What Is the Importance of a Corporate Governance Model?

Nicholas J Price
A corporate governance model is much like the foundation of a building. A well-built corporate governance structure that's strong and solid weathers the test of time and the elements. A weak or cracked foundation eventually gives way, and the building comes tumbling down. When we are investigating a fallen building, at some point, the rubble will reveal whether the cause of destruction was attributable to the people, the process or the technology that created the infrastructure.

Corporate governance structures work much the same way, except that they're much more interconnected and complex than constructing a building. Corporations may follow basic plans, but there's no one-size-fits-all approach to corporate governance models.

People, processes and technology form the infrastructure that sets the rules that make corporations function. Corporate infrastructures govern the companies' day-to-day activities and define their corporate culture. The board of directors' level of commitment to trust, accountability and transparency forms the base of the infrastructure. The stronger the basic corporate principles of governance are, the stronger and more prosperous the corporation will become.

Corporate Governance Structures Ensure Ethical, Responsible Market Practices

Governance is a term that's important in many areas of our lives. It's important in how our state, federal and local governments meet society's needs. Governance is also important in how the authorities hold themselves accountable. Governance is how we monitor our own behaviors and it's how corporations conduct their operations. In every situation, there is typically a reward for good behavior. There are consequences for unsavory behavior as well.

Each of us is responsible for governing ourselves ' our behavior, our attitudes, our work ethic, our relationships, our financial health and virtually every other aspect of our lives. When we govern ourselves well, we're more likely to enjoy personal satisfaction and success. When we throw caution to the wind, we're likely to get tossed about and thrown down hard.

Every level of government was designed with a built-in system of checks and balances that provides for the needs of people and keeps them safe. When government officials participate in corruption, fraud or other unethical behavior, it can have devastating effects on their constituents.

Our police and military divisions have internal affairs departments that address injustices, discrimination and crime within their ranks. Insubordination and failure to obey rules may result in their officers, peers, the general public or themselves getting hurt or killed.

Corporate governance models are important because corporations that operate haphazardly have major negative effects on many other businesses and people.

State, federal and local governments impose some regulations on corporations. Corporations must hold themselves accountable for all the rest. Corporate governance requires corporations to institute their own policies, rules and standards to prevent loss of profits and other major disasters.

The scandals at Enron and Wells Fargo are prime examples of the devastating consequences that can happen when corporate boards fail in their duties of oversight and risk management. Signs of weak or nonexistent governance create fear and distrust of the shareholders. Losing their trust leads to lack of financial support and reputational risk.

Shareholders and stakeholders are also quick to recognize governance models that practice good principles of corporate governance. Corporations that are accountable to shareholders, customers and vendors will find favor in their eyes and keep their foundations strong.

Principles of Good Corporate Governance Structures

Corporations need to spend time on forming their vision, mission, values and culture when deciding on their own principles of good corporate governance. There are a few basic principles that all corporations should recognize.

Equity and Fairness Among Shareholders and Stakeholders

It has been said that the squeaky wheel gets the grease. That's often the case when major shareholders gain a stronghold over smaller shareholders who feel they have a smaller voice. A good corporate governance structure gives all shareholders an equal voice regardless of their level of investment in the company. Corporate boards should offer a presence that shows that all directors have a similar vision and commitment to the mission.

Corporations would be remiss to overlook the voice of their stakeholders. Stakeholders tend to be well-connected with the community and the press. Gaining the trust and confidence of stakeholders protects and uplifts a corporation's reputation.

Promoting an Ethical Culture

Boards of directors need to establish and maintain an ethical code of conduct. They must also communicate their code of conduct throughout the organization and enforce it uniformly. The code of conduct must be strongly modeled from the top-down. Board directors, senior executives, managers and employees who behave badly can cause expensive legal problems for the corporation and destroy its reputation.

Corporations may try to hide their indiscretions. Businesses that participate in underpaying their employees, taking advantage of impoverished individuals, abusing or exploiting outsourced employees, or failing to account for negative impacts of their corporation on the environment will ultimately surface and harm the corporation. Damage can be difficult to undo and can cause loss of customers and declining sales.

Transparency Develops Trust

In addition to strategic planning and mitigating risk, one of the prime activities of corporate boards is analyzing financial records and earnings reports. Shareholders and stakeholders look for assurance that those reports are accurate, and not inflated or exaggerated. Accurate recording and documentation keep corporations honest and out of trouble with the law, as well as promoting widespread trust.

Enterprise Governance Management Systems Provide Tools for Good Corporate Governance

The complexity and interconnectivity of today's corporate world demand a corporate commitment to enterprise governance management. Enterprise governance management (EGM) is the discipline of applying technical tools and resources to the full range of governance needs to govern at the highest level and deliver long-term success and sustainability.

In short, it's nearly impossible for boards of directors to meet the needs of enterprise governance management without the help of enterprise management software solutions. Boards need the assistance of secure board portals that fully integrate with software solutions that manage other aspects of good governance like Board Evaluations, D&O Questionnaires, Board Management, Meeting Minutes and Entity Management. Enterprise management systems take care of corporate governance structures so that board directors and senior managers can focus on taking care of business.
Stay Prepared for What’s Ahead
As stakeholder demands rise, companies need to rethink their governance infrastructures. Download the Governance Checklist for four critical steps to follow.
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Nicholas J. Price
Nicholas J. Price is a former Manager at Diligent. He has worked extensively in the governance space, particularly on the key governance technologies that can support leadership with the visibility, data and operating capabilities for more effective decision-making.